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United States Commodity Funds, the company behind the ultra-popular natural gas (UNG) and crude oil (USO) products, has laid the groundwork for another unique exchange-traded commodity product. In a recent SEC filing, USCF outlined some details for a proposed Asian Commodity Basket Fund, which would include exposure to commodities deemed to maintain “systemic importance to Asian economies, including the three major Asian economies of China, Japan and India.” The filing noted that the proposed fund may also include futures contracts that trade on an Asian domiciled futures exchange.

The construction of the underlying index of commodity futures will take into account a number of different factors, including:

  • Percentage of global production that occurs in Asian countries
  • Percentage of global consumption that occurs in Asian countries
  • Tendency of the Asian economies to be either net importers or net exporters of a particular commodity
  • Size and liquidity of the regulated futures markets based on such commodities.

The result of this approach is a basket of futures contracts deemed to generally reflect Asian demand for physical commodities. The fund would generally include near month and next-to-near month futures contracts, with the “roll” process occurring on a monthly basis.

Asian economies have become increasingly important drivers of commodity prices in recent years, as rapid urbanization in developing economies has accounted for a significant portion of global natural resources usage. Swelling urban areas and aggressive infrastructure campaigns throughout the continent have translated into an insatiable appetite for all types of natural resources, boosting the fortunes of commodity-intensive economies throughout the world. Despite some signs of slowdown in China and elsewhere, investors generally expect that demand from Asian markets will remain strong in coming years.

So this proposed ETF essentially would offer a way to achieve commodity exposure that is targeted in that it tilts holdings toward resources that are particularly in demand within the economies of Asia.

Under The Hood

According to the filing, the benchmark contracts to be included in the proposed fund would include various types of commodities, ranging from energy resources to precious metals to agricultural commodities:

Commodity Base Weight DBC Weight
Crude Oil: Light/Sweet-Brent 20% 24.8%
Crude Oil: Medium-Dubai/Oman 2% 0%
Gasoil 2% 12.4%
Corn 10% 5.6%
Soybeans 10% 5.6%
Wheat 10% 5.6%
Copper 10% 4.2%
Zinc 5% 4.2%
Nickel 5% 0%
Sugar 5% 5.6%
Platinum 5% 0%
Gold 5% 8.0%
Silver 5% 2.0%
Canola Oil 2% 0%
Palm Oil 2% 0%

The filing noted that certain commodities that are of major importance to Asian economies, such as rice, iron ore and coal, lack liquid and regulated futures exchanges, and as such are not able to be included in the underlying benchmark.

The above table also includes the base weightings assigned to each commodity within the PowerShares DB Commodity Index Tracking Fund (DBC), the most popular exchange-traded commodity product. While there is some overlap, the proposed fund from USCF would maintain a relatively unique portfolio that features smaller allocations to energy commodities and higher weightings to agricultural resources (it should be noted that there are several resources - such as aluminum and natural gas - that are found in DBC but would not be included in the USCF fund).

Most exchange-traded commodity products maintain hefty allocations to energy commodities, including crude oil, natural gas and heating oil. But a few offer up access to more diversified baskets of futures contracts The Greenhaven Continuous Commodity Index Fund (GCC), for example, is linked to an index comprised of equal positions in 17 contracts, resulting in an ag-heavy portfolio.

Innovative Commodity ETPs

Last year USCF launched its first broad-based commodity product, the United States Commodity Index Fund (USCI). That product determines which futures contracts to include in the underlying portfolio based on certain observable price indicators, including the extent of contango/backwardation in the related futures market and momentum scores. USCI has attracted almost $400 million in assets, thanks in part to an impressive performance record.

According to the SEC filing, the proposed fund would charge an annual management fee of 0.90%. Expense ratios for the Commodities ETFdb Category range from 0.50% to 1.25%, with an average of 78 basis points.

Disclosure: No positions at time of writing.

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Source: In Development: Commodity ETF With Asian Twist